The network origins of trade comovement

Abstract

I develop a production network model of the world economy that features Transcendental Logarithmic (a.k.a. translog) aggregators of varieties. This gives rise to variable substitution elasticities that consistent with the evidence are inversely related to the importer expenditure shares per exporter at the country-sector level. I quantify the model using data for 1970–2018 from 19 OECD economies and 30 sectors. Compared to the analogous constant elasticity version of the model, I find that the translog model amplifies international shock transmission between major trade partners and attenuates transmission elsewhere, which to an extent resolves the “trade comovement puzzle”.